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11/15/2011

China Record Corn Crop Still Failing to Meet Demand for Feed: Commodities

According to Bloomberg, China has reached its seventh record corn crop in eight years. That still will not be enough to meet demand, driving a fivefold gain in imports as prices head for the highest ever annual average.

Even though this year’s corn production in China is 6.7% more than last year, China will need to import 5 times more corn than predicted. The demand for corn in China is higher than the quantity being supplied.

Corn futures on the Chicago Board of Trade have gained 3.9 % to $6.535 a bushel this year and averaged $6.90, heading for the highest-ever annual figure.

This is an example of what happens when demand is greater than the quantity supplied. Excess demand is the amount by which the quantity demanded exceeds the quantity supplied. This excess demand has placed the corn market out of equilibrium. The result is a record high price for corn. Because of the excess demand, China is also willing to import corn from the U.S. at a much higher price, in order to meet the demand.

According to the article, the lower price of wheat should help keep the cost of corn down a bit. As the price of corn increases, farmers will switch to cheaper supplies for feed. Wheat is a substitute for corn. As the price of corn increases the demand for wheat will increase. The increase in demand for wheat will slightly reduce the demand for corn helping to keep its price from going through the roof.

6 comments:

I agree with Ethan. I think with Wheat being a substitute for corn, the price for wheat will go up, but only in the short-run. As the price goes up, the incentive to produce wheat will also go up, causing more farmers to grow wheat. This increase in the wheat supply will cause the price to drop back down to equilibrium. I think the same could be said about corn. As the demand from China to import corn increase, more farmers will be willing to produce corn, increasing the supply, and lowering the price to import for China.

I agree with Ethan and Mitchell. China’s demand for corn is definitely outpacing the supply. The United States and China have both significantly increased their cattle inventory in the past decade causing a drain on corn supply. However, one of the major reasons that corn is high right now is due to the fact that we had a late growing season in the United States (due to great amounts of flooding caused by rain, as discussed in the article). Consequently, many producers were lucky to even get their crops in before winter hit. Most farms in the intermountain and central U.S. were 30 days behind schedule because of late planting and cooler weather in October and September, this would not allow for the corn crops to dry down adequately to harvest. The United State's delayed yields were a major contributing factor in the spike generated in corn prices. Commodity markets are driven highly off of previous year inventories on hand, and current harvest yields. Though China had a stellar growing year, it does not outweigh the fact that cattle herd inventories and human consumption are on the rise. It is interesting to note the scale of global market prices. This turns into somewhat of game theory as discussed in economics. Next spring farmers will decide whether to plant corn, wheat, barley, or soy in their fields, trying to decide which will pay out the most profit. Three years ago hay prices were at $250 per ton, so the next year what did the average farmer do? Put more ground into hay. Hay prices, by the next summer, were down to $100 dollars a ton. This was another issue when we had the ethanol boom when farmers raced to plant more corn. The farmers did plant more corn, crude oil prices took a hard crash, ethanol plants became belly up, and corn fell through the floor with over-supply. They key is to know what to do in dominant strategy. So next spring, because of high corn prices, will we have more farm ground put into corn? Well we know one thing is for certain, we won’t have many more houses being planted…

Two thoughts: 1) don't forget that part of the "problem" with corn prices is that we are diverting food to (inefficient) fuel production, and 2) we complain about demand from China, but keep in mind this was a whole country that used to be malnourished. This is what it looks like when famine goes away.

Lando: if there was a dominant strategy, being a farmer would be easy. The message is that it's hard because there is no dominant strategy.

This is a very interesting topic to me. I immediately ask whether ethanol production is a practice that can be sustained long-term? The production of ethanol alone has had an extreme impact on the global supply of corn and has aided in driving prices through the roof. I have a hard time believing the benefits of ethanol production outweigh the extreme costs to the global economy similiar to what is happening in China. An amazing piece to this puzzle is the fact that there are thousands of food products and non-food products alike that are corn based or have a component of corn in them.

But, it was never about the economics. This was really all about farm belt politics getting dressed up with economic "necessity". It's really just a money grab, and they tend to get unwound eventually.